Southwest Florida

How Joint Tenancy Creates Problem for Seniors

Joint tenancy
Joint tenancy may hold hidden dangers.

Parents adding children or other family members as joint tenants (joint owners) on their assets is an example of an overly simple “solution” to a complex problem. It doesn’t work, even though it seems as if it should.

As explained in the article “Beware the joint tenancy trap” from Monterey Herald, putting another person on an account, even a trusted child or life-long friend, can create serious problems for the individual, their estate, and their heirs. Before going down that path, there are several issues to consider.

When another individual is placed as an owner on an account or on the title to real property, they have a legal ownership in that property equal to that of the original owner. This is called joint tenancy. If a child is made a joint tenant on a parent’s accounts, they would be entirely within their rights to withdraw every single asset from those accounts and do whatever they wanted with them. They would not need the original owner’s consent, counsel, or knowledge.

Giving anyone that power is a serious decision.

Making a child a joint owner of assets also exposes those assets to claims by the child’s creditors. If either owner files for bankruptcy, the other owner may have to buy back one-half of the asset at its current market value. Or, if the child goes through a divorce, his portion may end up with your ex-daughter-in-law. Another example: if the child is in an accident and a judgment is recorded against the child, you may have to buy back one-half of your joint tenant property at its current market value to settle the claims.

There are other complications. If one joint owner of the asset dies, joint tenancy usually provides for the right of survivorship. The property transfers to the surviving joint tenant without going through probate and with no reference to a Will – which is what people focus on when they use this method as an end-run around true estate planning. What they don’t realize is that if the parent dies and the asset transfers directly to the joint tenant—let’s say a daughter—but the Will says the assets are to be split between all of the children, her claim on the asset is “senior” to the rest of the children. That means she gets the joint asset and the four siblings split any remaining assets that don’t have joint owners or beneficiaries.

If there is any friction between siblings, not having equal inheritances could create a fracture in the family that can’t easily be resolved.

Income tax exposure is another risk of joint tenancy. When someone is named a joint owner, they have an equal ownership interest in those assets, at the original owner’s cost basis. When one owner dies, the remaining owner gets a step up in basis on the proportion of the assets the deceased person owned at death.

Let’s say a father adds his son as a joint owner on his home when its fair market value is $300,000. Dad’s cost basis (what he’s invested) is $250,000.When Dad dies, the fair market value is $350,000. At his death, the son gets a step up in basis on one-half of the assets—the assets that the father owned ($175,000). His half of the assets retains the original basis ($125,000). So his cost basis in the house is $300,000. If he sells it for $350,000, he’ll pay capital gains taxes on $50,000. But if the house was owned solely by the father, the son would get the full step up in basis on the father’s death ($350,000), and if it sold for that price, would have no capital gains taxes due.

Additionally, adding a joint owner to any asset will adversely affect both joint owners’ qualification for needs-based government benefits, such as Medicaid for nursing home costs.

Given the complexities that joint tenancy creates, parents need to think very carefully before putting children’s names on their assets and real property. A better plan is to make an appointment to speak with an estate planning attorney and find out how to protect the parent’s assets through other means, which may include trusts and other estate planning tools.

Reference: Monterey Herald (Sep. 11, 2019) “Beware the joint tenancy trap”

Other articles you may find interesting:

What Should I Know About Reverse Mortgages?

State Taxes on Retirees Differ by Type of Retirement Income


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